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4 investing mistakes even smart people make

Business Insider 17/09/2015
A step off your plan could lead to a tumble. © Provided by Business Insider A step off your plan could lead to a tumble.

We all learn from our own mistakes. But when you’re making critical decisions regarding your investments, any blunder can have serious consequences on your financial future.

Here are some mistakes even the smartest people make — and some proactive steps to guard against them.

1. Going off-plan

Altering your investment portfolio based on yesterday’s top performer or today’s daily news may end up hurting investment returns. Many studies — including a 2014 report from financial research firm DALBAR, Inc. — have found that individuals who buy and sell stocks on their own often generate lower returns than if they had just purchased and held a Standard & Poor’s 500 Index Fund.

It is important to develop a long-term investment plan and stay the course in order to reach your financial goals. This plan should be designed to provide a clear roadmap for achieving a range of needs and goals, from paying monthly rent or mortgage and saving for college, to investing for retirement, during both up and down markets.

2. Letting your emotions take over your decisions 

Try not to get carried away by your emotions. © Provided by Business Insider Try not to get carried away by your emotions.

The ability to stick with a consistent investment strategy is often jeopardized by fear, greed, and nervousness. These emotions can cause investors to move their money into safer positions and conservative investments which may not grow enough to cover retirement or other long-term costs.

While the financial markets rise and fall without warning, soaring one day and dropping the next, it is vital to stay focused on your long-term investment plan.

And remember, over time, each asset class will take its turn as a leader or laggard. Avoid impulsively selling an underperforming investment and stay the course with a diversified portfolio that is able to withstand inevitable short-term rises and dips in the market.

3. Being unaware of how taxes affect your returns

Remain alert when it comes to taxes. © Provided by Business Insider Remain alert when it comes to taxes.

Be aware of your tax bracket and how tax consequences impact your total investment return. Taxes can greatly impact your investments – both while you are working and in retirement.

If you are working and have many years until you need to access your money, your taxes and strategy are a lot different than when you are retired and pay taxes as you withdraw money from the returns generated within a workplace retirement plan such as a 403(b) or 401(k).

Taxes are highly individualized based on financial situations and can often be quite complicated. Consulting with your financial adviser and accountant is a smart strategy to consider in helping to craft a retirement income plan that takes taxes into account.

4. Changing your strategy due to interest rates 

Try not to be too hasty when adjusting your investments. © Provided by Business Insider Try not to be too hasty when adjusting your investments.

Interest rates have been held at historic lows since 2008, a move by the Federal Reserve to push down the cost of borrowing and spark economic growth. The Fed has indicated that short-term interest rates will likely increase this year, which could cause short-term stock market volatility and depress bond prices, as rising interest rates tend to push bond prices lower.

Despite these coming changes, do not overreact to market volatility. Higher interest rates should not alter your long-term investment strategy if your assets are invested diversely across stocks, bonds, and real estate.

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